The national government could instigate the aggregate economic output through injecting the lumpsum amount of money within the nation, since government expenditures, G, hardly depend upon the rates of interest and is rather considered as an exogenous factor.
In case of an open economy, there are also chances of increasing the contribution of trade balance (X - M) within the nation, by lowering the rate of exchange. However the problem, in this case, is that the export revenues might not change as dramatically as expected in theory. Hence, the net economic position might not alter much.
The tax rates might also be reduced so as to stimulate the consumption levels through rising in the amount of disposable income.
Thus, there are two effective measures that the national government could adopt – firstly, increase the amount of government expenditure and secondly, lower the tax rates. A point to be noted in this case is that the substitute policy measures are primarily fiscal in nature since monetary policy tools work via fluctuations in the rate of interest, which is inert in a liquidity trap situation. The Effectiveness of Interest Rates.
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